Sacrifice Ratios for Euro Area Countries: New Evidence on the Costs of Price Stability

Ansgar Belke and Tobias Böing

Australian Economic Review, 2014, vol. 47, issue 4, 455-471

Abstract: type="main" xml:lang="en">

The purpose of this article is to deliver new estimates of the sacrifice ratio of Euro area countries. A high sacrifice ratio means a large loss of gross domestic product (GDP) or employment for a given reduction in inflation. In order to estimate the cost of adjustments in inflation rates by the sacrifice ratio, we apply, firstly, a structural vector autoregressive technique following Cecchetti and Rich and, secondly, one by Ball based on historical disinflationary episodes. Our findings indicate that most countries have sacrifice ratios of between −1 and 2 per cent of real GDP for a reduction in inflation of one percentage point. In some cases, these estimates deliver negative sacrifice ratios.

Date: 2014
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